As part of the Introduction, I developed the distinction between “old” and “new” neoclassical economics. Neo-classical economics is the integration of “classical” economics with utility theory. In classical economics, all value was determined by production costs – that is, on the bottom half of the flow chart in your text. With utility theory, all value was determined by the “utility” felt by the buyer – that is, on the top half of the flow chart. In neo-classical economics, value is determined by the interaction of both sides in Product Markets.
“Old” neo-classical economics uses a large number of simplifying assumptions in its analyses. “New” neo-classical economics drops these assumptions, usually one at a time, in its analyses. The results are often different. Here is a list of those simplifying assumptions:
1.
All industries are either perfectly competitive or monopolistic.
2.
All factors, and all products, are homogeneous.
3.
Utility comes only from consuming goods and services, and is limited to the single individual doing the consuming.
4.
The economy operates on the head of a pin – there is no space in the analysis.
5.
There is no real time in the analysis.
6.
Because there is no time, there is no future, so there is no uncertainty.
7.
All decisions are made in impersonal, decentralized markets. This strictly implies that: a – all agents, buyers and sellers, are price takers, or saying the same thing, b – no agent has to consider the effect of her decision on others, which means she doesn’t have to consider how others will react to her decision.
In this course, in the first two units – labour demand and short-run labour supply – we use “old” neo-classical analysis. We finish in the third unit – long-run labour supply – with “new” neo-classical analysis. In that unit the assumptions listed above as #s 5, then 2, are systematically dropped.